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CBA 'very comfortable' with dividends: Narev

Commonwealth Bank's management are not overly concerned by a fall in global bank shares and are comfortable with maintaining current dividends, says CEO Ian Narev.

Seven years on from the financial crisis that shook the world's faith in the global banking system, regulators have changed the game dramatically for the banks to make sure taxpayers are never forced to save them again. Banks were forced to hold more capital, engage in less-risky business and adhere to tougher rules.

But faith in the banks is wavering again. Investors are dumping bank shares in a panic, while debt spreads are spiking to multi-year highs.

Australia's banks have been caught up in indiscriminate selling. Their reliance on foreign capital means if investor anxiety around the world rises, so too does cost and access to funding, squeezing their profit. In a week that Commonwealth Bank announced a record $4.2 billion half-year profit, $25 billion of sharemarket value was wiped off the collective value of the big four.

But is this a repeat of 2008? Are the banks the focal point again of a systemic crisis?

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Not quite. Even the chief protagonist from The Big Short, the box office hit that captured the folly of the banks in the last crisis, does not believe it.

Never been safer

Hedge fund manager Steve Eisman (played by Steve Carrell in the film) told the Globe and Mailthe banking system "probably hasn't been this safe in my lifetime".

"In 2001, Citigroup was levered 22 to one. In mid-2007, it was levered 33 to one. Today, it's levered 10 to one."

So what is going on? Why is the value of the biggest banks being savagely written down?

In part it's a hangover of the crisis. In an effort to make the banks suffer, they have been stuffed full of capital, have been highly constrained in their activities and consigned to modest profit. They have little latitude.

The large global banks have paid $US220 billion in fines since 2009, weighing on their returns as they have sought to recapitalise their institutions.

But patient shareholders who have footed the bills are finally realising that their role in the new banking order isn't to rake in the profit.

Rather it is to buttress the system so that depositors, and crucially taxpayers, never contribute a dime towards a future failure. They're the lowest rung on the capital structure, or the "first-loss piece", to use bond market jargon.

Shockwaves through markets

The importance of the capital structure of the banks was evident in the past week, when fears Deutsche Bank could miss a payment on its "contingent capital" securities sent shockwaves through markets.

The "CoCo" bonds are a new version of capital securities that effectively "bail-in" when the bank is under stress, converting to equity or being written off to zilch. By absorbing billions of losses, the securities effectively protect depositors and taxpayer funds.

As one London-based analyst said, they have become a double-edged sword. The instrument does achieve its function of providing "bail-in" capital but their market value also acts to transmit fear of a bail-out, and panic among shareholders.

It's an important point, especially as global regulators led by the Bank of England's Mark Carney consider a new class of debt aimed at ending the "too big to fail" conundrum.

The grand plan of regulators is for all types of bonds to include clauses to be "bailed-in" but that could increase costs for the banks, and for their customers – the very taxpayers the regulation is attempting to protect.

On the matter of banks, Reserve Bank governor Glenn Stevens offered some important insights on Friday, pointing out the low price-to-book ratios of the global banks, which measure the sharemarket value against the accounting value of the banks, shows a persistent lack of faith.

"In other words, the markets rightly or wrongly – and they have been saying this for some time – doubt the underlying value of the banks is what their accounts say they are," he said.

Well placed for recovery

Stevens also spoke of the reluctance of Europe's banks to write off bad loans and recapitalise, in contrast to the US, which took the problem "head-on", meaning banks were well placed to facilitate an economic recovery.

Australia's banks, meanwhile, are valued by the sharemarket at multiples of their accounting assets. The "price-to-book" ratio that Stevens is referring to is three times for CBA, compared to less than 0.3 times for Deutsche Bank and about 0.6 times for US banking giant Citigroup.

The relative strength means Australian bank chief executives have the luxury of being able to present grand "visions" of their institutions as digital innovators, rather than big building societies.

The reality is a large part of the big banks' shareholder registers are simply after the income paid by a fully franked dividend.

The banks' ability to sustain those generous payments as regulators demand ever-higher buffers from shareholders might be the next point of contention.

Australia's banks, well run and ambitious as they are, cannot escape their fate as regulated utilities. They too have less latitude.

This week's message from the sharemarket is that their vision for Australia's banks is not a million miles from the despondent new Deutsche Bank chief executive.